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Investment Program, Policy and

Procedures

IMTA Treasurers - Institute

November 16, 2021

Sofia Anastopoulos, CFA

Executive Director/ CIO

sofia.ana@investIMET.com

(708) 536-7333

Expectations and agenda

I. Introductions and Review of Attendee

Expectations

II. Investment Program

III. Investment Policy

IV. Investment Procedures

V. Cash Flow Forecasting & Investing

VI. Market Update

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Investment program

Reporting

&

Review

Statutes

&

Investment

Policy

Optimal

Investment

Program

Disciplined

Management

Process

Cash

Flow

Modeling

Compliance

MonitoringInvestment

Style

&

Benchmark

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GFOA Best Practice: Investment

program for public funds❑ Management and monitoring of investment activity

❑ Allows structure to set policy, make decisions, and safeguard

the government’s financial assets

❑ Fiduciary responsibility, regardless of size or type of

government entity

❑ Components:

✓ Develop investment leadership team

✓ Identify funds used for investments & characteristics

✓ Review all Federal, State and Local laws & regs

✓ Establish a risk profile

✓ Determine Portfolio Management Team

(internal/external)

✓ Create and implement an investment policy4

Investment program

“Governments have a fiduciary responsibility in managing their funds,

including the ongoing management and monitoring of investment

activity. A government’s investment program should derive from the

entity’s Investment Policy.

Developing a public funds investment program is essential to

effective financial management, and it sets the foundation for creating

protocols and internal controls, constructing and managing the

portfolio, navigating changing economic conditions, and

communicating information to stakeholders. While different types and

sizes of governments require differing levels of complexity in their

investment programs, all governments need to recognize their

fiduciary responsibility. Having an established public funds

investment program provides the structure to effectively set policy,

make decisions, and safeguard a government’s financial assets.”

Developing an investment program

❑ Investment Leadership Team

❑ Portfolio Management Team

❑ Decision Making Process

❑ Investment Policy & Procedures

❑ Cash Flows

❑ Portfolio Strategies/Management

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Fiduciary duty

❑ An Individual / Institution tat has special relationship of

trust with another person/ group (legally responsible for

their assets). Examples:

✓ Treasurers

✓ Finance directors

✓ Investment personnel

✓ Oversight boards

✓ Investment advisers

❑ Brokers are NOT fiduciaries

❑ By Law A Fiduciary Must:

✓ Make decisions in the best interest of beneficiary;

✓ Always put beneficiaries’ interests before their own; &

✓ Act prudently. 7

Prudence standard

1. Prudent Person

2. Prudent Investor

3. Prudent Expert

Prudence Language Typically Includes Statement

Similar To:

“…shall act with care, skill, prudence, and

diligence under the circumstances then

prevailing…that a prudent person acting in a like

capacity and familiarity with those matters would

use…”

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Compliance with fiduciary duty

❑ Test of fiduciary duty compliance is one of conduct,

not performance

❑ Measures for evaluating compliance

✓ Establishment of formalized investment policy

✓ Compliance with policy

✓ Prudent investment decisions

✓ Best price trade executions

✓ Diversification of risk

✓ Strict avoidance of conflicts of interest

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Investment policy

❑ Does your entity have an investment policy?

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Investment policy

❑ Defines and guides the investment program

✓ Enhances quality of decisions

✓ Demonstrates commitment to fiduciary care

✓ Defines legal & permitted activities, who’s in

charge, how you measure results, who your

counterparties are to counterparties

❑ Protection

❑ Dynamic process

❑ Do not regurgitate state statute

❑ Do not copy, clip and paste

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Investment policy – first line of

defense❑ Single most important element of investment program

❑ Provides flexibility to change within controls❑ Communicates investment philosophy and

objectives for board and to constituents

❑ An adopted policy:

✓ Demonstrates commitment to fiduciary care of public

funds

✓ Indicates government investments well-managed to:

✓ Rating Agencies

✓ Capital markets

✓ Citizens

❑ Should be reviewed annually / updated periodically

❑ Note – It is both an internal and external document12

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Investment policy

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GFOA Best Practice

Investment policy

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GFOA Best Practice

Investment policy

How to create a policy

1. Examine state statutes2. Examine collateral/depository/investing statutes3. Review sample investment policies 4. Draft investment policy5. Have right parties review 6. Adopt by formal action of governing body7. Establish written investment procedures8. Review annually

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Who is involved?

❑ Investment officers or treasurers

❑ Governing bodies

❑ Support staff

❑ Legal staff

❑ Commercial bankers

❑ Auditors

❑ Accounting

❑ Investment Committee (optional)

❑ Advisers, Broker/Dealers

❑ Roles of all involved parties must be considered

✓ Impact on parties also must be considered

Policy components

Policy components

❑ Introduction and Statement of Intent

✓ Overview of entity

✓ Sound fiscal management

✓ Adoption of policy

✓ Approval by governing board

❑ Scope

✓ Funds covered by policy (comingling)

✓ Economic development

✓ Specific Purpose

✓ Other

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Policy components – objectives

❑ Safety Protect principalMitigate credit riskMitigate interest rate risk

❑ LiquidityMeet anticipated cash flow requirements Since all possible demands cannot be anticipated, hold securities that have active secondary markets

❑ Return Once safety and liquidity requirements have been met, portfolios are structured to earn “market rates of return” or reasonable return

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Policy components

❑ Delegation of Authority

✓ Recognizing and referencing:

• State Statutes (investments, collateral,

etc…)

• Local ordinances and rules

• Federal Tax requirements (ex…

Arbitrage bond proceeds)

✓ Establishing local control

❑ Statement of Prudence, Indemnification &

Ethics

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Policy components

❑ Authorized Investments & Transactions

✓ State Statutes

✓ Risk tolerance

✓ Types of securities & transactions

✓ Maximum maturities & weighted average

maturities

✓ Credit criteria

✓ Repurchase agreement criteria

❑ Collateralization

✓ Repurchase Agreements

❑ Bank deposits

❑ CD’s > $250K21

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Policy components

Competitive procurement is essential

❑ Competition enhances government knowledge

✓ technical

✓ pricing

❑ Competition promotes “fairness”

✓ vendors more likely to participate, support

government

✓ citizens and interested parties appreciate

government’s care of their monies

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Policy components

Safekeeping and custody

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Policy components

Delivery / Safekeeping

✓ Criteria for selecting safekeeping institution

(usually a bank)

✓ Delivery versus payment (DVP) settlement (Best

practice)

• Fed wire

• Depository Trust Company (DTC)

✓ 3rd party needed to perfect ownership (in govt’s

name)

✓ Consider a custodial and/or trust relationship

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Policy components

❑ Risk management and diversification

✓ Managing market and credit risk

✓ Maximum maturities and weighted average

maturities, duration

✓ pricing

✓ Competition promotes “fairness”

✓ vendors more likely to participate, support

government

✓ citizens and interested parties appreciate

government’s care of their monies

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Policy components

❑ Reporting

✓ Disclosure of activities & holdings

✓ Methods for calculations

✓ Frequency of reports & who receives them

❑ Performance Benchmarks

✓ Criteria for selecting benchmarks

✓ Minimum yield standards

✓ Methods of calculation

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Policy components

Safekeeping and custody

❑ A firm other than the party that sells the investment

provides transfer and safekeeping of the security.

❑ Financial firms should not serve as both broker-dealer

and custodian.

❑ Investments should be settled in a delivery-versus-

payment (DVP) basis

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Policy components

In Illinois – recent changes…

❑ ESG issues

✓ Environmental/social/governance factors are used

to more comprehensively analyze an investment

based on its risk profile and return potential

✓ complements traditional and technical analysis

✓ Integrating these factors helps public funds better

fulfill their fiduciary duty

✓ Signed into law – 2019, & became effective1/1/20

“All state and local government entities that hold and

manage public funds should integrate material,

relevant and useful factors into their policies,

processes and decision-making 28

Policy components

In Illinois – recent changes…

❑ Corporate securities

✓ Public funds investment act allows for corporate

securities

✓ Provides that no more than one-third of a public

agency's funds may be invested in short-term

obligations of corporations that mature not later

than 270 days

✓ Provides that no more than one-third of a public

agency's funds may be invested in obligations of

corporations that mature more than 270 days but

less than 3 years from the date of purchase.

✓ Effective 8/6/21 29

Investment policy

❑When was the last time your government reviewed

your investment policy?

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Annual review

❑ Annual compliance and policy review

✓ Has the “circumstance then prevailing” changed

✓ Should the policy change?

✓ Is the benchmark still viable?

❑ Policy reviews will often result in policy updates which are taken to the governing body

✓ The approach for a review parallels the initial

creation process

❑ Review does not necessitate changes

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Do not forget………..

❑ A policy is a living document that requires

ongoing review and understanding by the

governing body as well as the investment

officers.

❑ To be viable it must reflect your unique needs

and situation. It must control for risk but be

flexible enough to adjust to changing

conditions in your or the markets conditions.

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Investment procedures manual

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Investment

Procedures Manual

Village of Best

Practice, Illinois

2021

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Investment procedures

❑Who has written investment procedures?

✓ Memorialized in a manual?

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Procedures

❑ Projection of anticipated cash receipts

❑ Projection of anticipated cash disbursements

❑ To create an estimate of investable cash

balance

✓ Liquid funds

✓ Core funds

Over time, longer term investments can

generate higher returns

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Procedures

❑ Guidelines for more specific written procedures (support policy)

❑ Key control elements

✓ Control of collusion

✓ Separation of transactions and

recordkeeping

✓ DVP in safekeeping

✓ Delegation of subordinates

✓ Written transaction records and

confirmations

✓ Dual authorization on wires

✓ Continuing Education

✓ Maintenance and monitoring of procedures36

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Procedures

❑ Monitoring Credit Rating

✓ Credit ratings should be monitored at least

monthly

✓ What action will be taken

• Disclosure

• Immediately liquidate or consider

conditions

❑ Monitoring FDIC Status

✓ Check on FDIC status for your CDs in a

bank’s merger/acquisition

✓ Officer should monitor at least each Friday

✓ What action will be taken

• Immediate liquidation37

Procedures

❑ Securities no longer in compliance with achanged policy or new statute

✓ Any security currently held that does notmeet the guidelines of this policy shall be exempted from the requirements of the policy. At maturity or liquidation, suchmonies shall be reinvested only as provided by policy.

❑ A temporary holding period of time can be established for securities not meeting policyguidelines.✓ Securities must come into compliance

within xx months of a• policy’s adoption by the governing body.

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Procedures

Collateralization

❑ Require collateral on all time and demand

deposits

✓ Repurchase collateral is a buy/hold but should meet conditions

❑ Perfection of pledge

✓ Reporting should come directly from the custodian not the trader or broker/dealer

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Procedures

Mitigate / Manage market / liquidity risk ❑ Sample controls:

✓ Liquidity buffer handles unexpected liabilities ✓ Maximum % of callables✓ Establish $$ bucket targets by time horizons✓ Maximum maturity✓ Maximum weighted average maturity

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Questions

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